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Grains analyst expecting ‘very strong’ 2013 prices

Illinois Correspondent

BLOOMINGTON, Ill. — Following a year that saw a historic plummet in projected USDA corn yields and a resultant spike in prices, farmers and traders can expect both corn and soybean values to remain “very strong” in 2013.

This is according to Jody Lawrence of Strategic Trading Advisors, who delivered a presentation to farmers titled “Marketing Plans for a Difficult Year” at the 2012 Illinois Commodity Classic Nov. 20 in Bloomington.

“Clearly this year has been one for the record books,” said Lawrence, who hails from the Nashville, Tenn., area. He used an overhead projection illustrating dramatic changes in USDA’s month-to-month corn production estimates as proof of just what an atypical crop year was 2012.

“One hundred sixty-six bushels (an acre) was projected (in June) mainly because the crop went in easily and everything was looking good. The carryout was projected at 1.741 billion bushels” with a price range of just under $5, Lawrence noted.

But as the drought set in and progressed over the summer, the USDA drastically revised its corn yield estimates. Its June projection of 166 bushels dropped by 20 bushels in July and was adjusted downward by another 22.6 in August.

“That loss of 20 bushels an acre is the largest change from the June to July report in the history of the USDA reporting service,” Lawrence said. “In the course of eight weeks, 42.5 bushels an acre were lost and adjusted into the market.”

The result? “Look how quickly corn went up from the mid $4s to the mid $8s,” he said.

The adjustments to USDA’s yield projections were also atypical, Lawrence explained, because of its quick reaction to the expected effects of the drought. In the past USDA has been more reticent to make drastic month-to-month adjustments to projected yields.
In the end, approximately 1.1 billion bushels of corn to be used for feed and fuel were lost to the drought of 2012, causing a dramatic price spike. Lawrence said the figures – and lessons – from 2012 can be applied to future investment and trading decisions.

“For every billion bushels of U.S. production (lost), you can calculate that the price (of corn) is going to move roughly $3.50 to $4. Every 100 bushels of production is worth about 30 to 40 cents per bushel,” said Lawrence. “When you see 100 million more bushels used for ethanol, feed or exports, or lost to (natural disaster), figure that the price of corn should be moving 30 to 40 cents.”
USDA’s planting intentions report for 2013 shows farmers plan to plant 97.5 million acres of corn and 80 million acres of beans, along with 56.8 million acres of wheat and 2.3 million acres of cotton next year. Just 2.6 million acres will be set aside for conservation programs due to “great” margins expected for farmers in 2013, Lawrence explained.

He expects next year’s input prices to remain stable from 2012 ($600 input costs fetch $900 income per acre) and that corn and soybean stocks will be “record tight” by spring. He predicts USDA’s final crop report will not waver much from November’s report of 122.3 bushels per acre, and that corn prices will remain stable in the $7.30-$8 range.

The million-dollar question, according to Lawrence, is whether the drought will continue into next spring and summer in some Corn Belt and Plains states, causing prices to soar again.
“Every farmer I’ve ever talked to would like to see a drought somewhere to support prices, as long as it’s not on their farm,” Lawrence quipped.

But the drought is no joke to those who reside in the Mississippi River basin south of St. Louis or farm in the area of the Missouri River, where water levels are dropping and the U.S. Army Corps of Engineers and Coast Guard are imposing draft restrictions on barges carrying grain and other products.

“If these areas don’t get a lot of snow this winter, if next year is even a slight repeat of this year in terms of drought, then you know what’s going to happen to prices,” said Lawrence.